The 2% Solution If you believe Foxtons' omnipresent ads, the discount brokerage will change the way real estate is sold. But can it survive a fast-cooling housing market, 948,000 angry Realtors, and its own hubris?
By Julie Sloane

(FORTUNE Small Business) – There are 98,000 people in New York, New Jersey, and Connecticut who wish Glenn Cohen would go away. They are the area's Realtors, and for the past three years the company that Cohen runs, Foxtons, has given them roughly $36 million worth of aggravation. With that sum, he has blanketed the region with advertising for his discount residential real estate brokerage, and he has no plans to stop. Foxtons ads are everywhere--television, radio, newspapers, billboards, buses, subways, hot dog-cart umbrellas, commuter ferries--all accusing Realtors who collect 6% commissions of overcharging for their services. "Overthrow the overpaid," screams one ad. This summer airplanes buzzed New Jersey beaches towing banners that read, beware of Sharks charging 6%.

The alleged sharks are not amused. "I can't see them being around for very long," says Patricia Schiller, who owns Patricia Schiller Real Estate in Putnam Valley, N.Y.

"A lot of agents hate my guts," Cohen, 42, admits matter-of-factly, "which is fine." After all, if you hope to revolutionize an industry, you're going to hurt a few feelings.

First it was stockbrokers who were one-upped by the Internet, which made it possible to trade stocks for less than a ten-spot. Then travel agencies got squeezed. Now Cohen is using the web to introduce a new business model--charging a 2% commission instead of the standard 6%--that could transform the real estate world, a behemoth industry that supports 948,000 Realtors and collects an estimated $56 billion in residential commissions annually. Although Foxtons is privately held and Cohen won't release financial data, he says that the West Long Branch, N.J., company sells about 7,800 homes a year.

Foxtons' U.S. competitors are responding with a variety of emotions--denial, anger, fear--but they've so far been unable to shake Cohen from pursuing his goal: In five years, he says, he expects to have spread from the New York City area into 15 major cities across the U.S.

A plan like that requires bravado, a trait that Cohen possesses in buckets. Seated in his corner office overlooking a parking lot, Cohen exudes confidence, ambition, and disdain for his rivals. "There's absolutely no way they can compete with us," he asserts.

But Cohen still has big questions to answer. Can Foxtons really wage a successful war against traditional real estate interests? How will it fare amid today's rising interest rates, and when most industry experts predict a flattening of home prices along with a decline in sales? And in an industry that rewards cooperation, can Cohen truly survive as the most hated man in real estate?

Residential real estate in America hasn't changed much in 40 years. Brokers employ state licensed agents, who are independent contractors working on commission, usually 6% of a sale. The seller's agent will price a house, market it, vet potential buyers, and negotiate the cost. For someone looking to buy a home, an agent will show houses, take care of negotiations, and advise on issues like schools, repairs, and permits. Traditionally the buying and selling agents split the commission, which is paid by the seller. In theory, real estate agents keep the seller's best interests in mind--the more the house sells for, the higher the commission. In practice, that may not be the case. Noted University of Chicago economist Steven Levitt studied more than 50,000 home sales in Cook County, Ill., and found that rather than push for the highest price, real estate agents had an incentive to close deals quickly for slightly less, allowing them to move on to the next one. When the agents sold their own homes, they kept them on the market ten days longer and sold them for 2% more.

Nevertheless, the Realtor model continues to dominate the industry. For the past couple of decades, four out of five homes have been sold through Realtors. One reason is the Multiple Listings Services, a set of comprehensive databases of houses for sale that shares listings among area real estate agents, encouraging them to bring their buyers and sellers together. It sounds nice, ensuring that the maximum number of potential buyers will see a home. In practice, it means that commissions need to be high enough to pay both brokers. And because it is unlikely that a Realtor will suggest a home that is not listed on the service, sellers are in a bind: Pay the 6% or risk getting a lower price for their house.

Yet after four decades of stability, the traditional business model is starting to crumble. Although the housing market has remained strong--a record 5.6 million previously owned homes sold last year--many analysts foresee the same pressures that transformed the brokerage and travel industries in the 1990s. At the top of the list: smarter customers. MLS information once held under lock and key by professional Realtors--lists of houses for sale, price information, photos, and seller contacts--is now increasingly available through online databases. The National Association of Realtors has a policy allowing its members to prevent their listings from appearing online, yet NAR's research shows that 71% of buyers use the Internet to assist their real estate search, up from 41% just two years ago.

The late-1990s economy left another mark on real estate: Thanks to the escalation of property values, sellers are now paying far more in commission fees for exactly the same service. For example, a 6% commission on the sale of a $500,000 home is $30,000. If the price of that house increases to $700,000 three years later, the commission would be $42,000. "For 40 years, prior to about 1999, brokers did not have to justify the cost of their service," says Ric Weidel, president of Weidel Realtors, a brokerage based in Princeton, N.J., with 500 agents. Now, he says, consumers are starting to balk. "This is a new phenomenon."

For the most part, the real estate industry has responded by cutting prices. "The average agent is unable to articulate his or her value," says Jeremy Conaway, president of RECON Intelligence Services in Traverse City, Mich. "The compromise is an agent who says, 'Let me continue to do it my way, but I'll do it cheaper.'" According to REAL Trends, a real estate industry research firm, the average commission has fallen from 5.98% in 1995 to 5.48% in 2000 and 5.1% this year.

Some agencies are taking a more creative approach. A handful of Realtors have begun offering an option in which buyers and sellers pick from a menu of traditional service offerings, paying only for those they decide to use. Other discount brokers--like the Bay Area's ZipRealty and Houston's eRealty--act as the selling agent while continuing to pay the buying agent a 3% commission. None of those business models has had much impact. "It's such a mixed-up industry," sighs Real Estate Intelligence Report publisher Frank Cook. "I think we need a new business model."

Cohen didn't know all that when he first came up with the idea for his real estate venture. He just knew he'd paid a bundle to sell his house. Born in Lakewood, N.J., and a lawyer by training, Cohen began his career with his father's real estate business in Shrewsbury, N.J., brokering land to developers. Later he did a stint as the CEO of a company in Red Bank, N.J., that developed a technology to ensure that employees washed their hands. (Don't ask.) After selling the patent in 1999, Cohen went out for a steak dinner with a friend to brainstorm his next career move. His friend commented that while driving to the restaurant, he'd seen a number of homes with for sale by owner signs. As he recalled that he'd paid $12,000 in commissions to sell his own townhouse in 1991, Cohen's mind began to race. "I didn't sleep the night after that dinner," he says. "I did the calculations in my head based on today's prices--6% is 20 or 30 grand. It can't cost that much to sell a house."

Cohen raised $2 million from friends and associates and launched YourHomeDirect.com in March 2000 with 40 employees. Since Cohen first opened his business, dozens if not hundreds of Internet-based realty companies have shut down. But Cohen's business has only grown. Today it has 400 employees and a new name. In 2001, London's largest residential broker--a privately held realty company called Foxtons--took a $20 million equity stake in Cohen's company. Cohen redubbed his firm first YHD Foxtons, then simply Foxtons. "We're creating a unified brand across the world," Cohen says, although he adds that right now there are no set plans to merge the two.

To cut costs, Cohen splits the work of the transaction, usually managed by one agent, among five specialists. A licensed real estate agent makes an initial visit to the seller's home, gathers information, and prices it. That may be the only time the seller and agent meet. Once the seller signs a contract, the agent uploads the home specs from his wireless Internet-enabled, Foxtons-logoed PT Cruiser, posting them on Foxtons.com. A property coordinator visits the home within the next three days to plant a Foxtons sign outside and augment the website with photos and video virtual tours of key rooms. When questions arise, the seller can contact the agent by phone or e-mail, but he is encouraged to call a central toll-free number manned by agents who have access to his file. Buyers who want to see a Foxtons home call that number, and after asking them to take a virtual tour and drive by the home, Foxtons checks and approves their credit and schedules an appointment. Once a buyer is interested, a negotiator settles with him on a price, and a closing specialist wraps up the details.

That still leaves the homeowner to tackle several key tasks that a Realtor usually handles. For a 2% fee, Foxtons agents don't show the home, hold open houses, or attend closings. (Customers who want their homes shown can opt for a 3% commission plan, but Cohen says that 90% of his customers pick the cheaper option.)

This solution doesn't suit everyone. Surekha Mehra, a 43-year-old consultant, listed a four-bedroom East Brunswick, N.J., home with Foxtons last fall. But after the initial meeting, she says, she found her agent and the closing coordinator difficult to reach and ended up dealing with lawyers and home inspectors on her own. Most frustrating, when one buyer made an offer, she didn't hear about it until days later, when the buyer called her directly. Mehra finally closed the sale in May for $293,000--$36,000 less than her asking price. "I had so many fits dealing with these people," Mehra says. "I would never go with them again." (Cohen says Mehra's experience was not typical. "We pride ourselves on availability," he says.)

Other home sellers and buyers relish the Foxtons approach. Ellen and Michael Mattesi listed their two-bedroom Nutley, N.J., home with Foxtons in July. In 24 hours--even before the virtual tour was posted--their home's web page received 58 hits and netted five calls. One day later they found a buyer for their asking price of $349,900. The deal fell through when interest rates went up, but Ellen Mattesi, a 32-year-old artist, says she's sticking with Foxtons: "I know my home inside and out. To pay someone $21,000 to come in and show it was ridiculous. That's a $14,000 difference."

Foxtons agents typically handle 20 to 50 homes at a time (as opposed to the average caseload of five to ten). In lieu of commission income, they are salaried and receive bonuses for each house sold, which makes their finances more stable--agents say their compensation is comparable with that of traditional Realtors. That also allows Foxtons to keep more of the commission. Because Foxtons generates leads through advertising, not fancy Main Street storefronts, agents work out of cheap, nondescript local offices. Finally, Cohen has added Foxtons Financial, a mortgage lender, which he says about half his customers use.

Oh, one more thing: For 2%, Foxtons will not list a home with MLS, opting instead to start its own listings service. The move is trademark Cohen: quixotic, anti-establishment--and potentially suicidal. For Foxtons to succeed, individual homebuyers need to come directly to its website, eschewing traditional forms of househunting, while sellers must be content to have their home visited by fewer potential buyers than would come through MLS. Foxtons offers a 4% plan that will list a home in MLS and offer a buyer's agent a 2% commission, but Cohen says it's irrelevant. "We only have it to appease those people who the traditional Realtors have mind-melded and cultized into believing that the MLS is really the answer to their problems."

As if that weren't enough, by not offering a commission to the buyer's agent, Cohen virtually ensures that no Realtor will voluntarily show any of the homes on his website. In July, Brenda Soong, a 46-year-old homemaker, listed her Paramus, N.J., home with Foxtons. A week later her neighbors tipped her off to a couple who were interested in taking a look. But their agent demanded a commission to show them the home. "No way," said Soong. "I went with Foxtons." Only after the prospective buyers agreed to dump the agent could they buy the home, which they did in August for $522,900.

Cohen insists that he doesn't need to attract traditional agents if he can get consumers to his website. Hence the $12 million yearly advertising and public relations budget, an attempt to create what his PR agency calls "visual surround sound." In addition to the traditional media ads and relentless postering of public spaces, Foxtons has three employees whose full-time job is to drive around logo-painted, double-decker buses in high-traffic areas. (The buses are never used for transporting people; the seats on the upper deck are fake.) In addition, Foxtons sends 250 to 500 postcards to a seller's neighbors when he lists a house and again when it sells. All that, Cohen claims, helps to bring one million unique visitors to Foxtons' website each month.

Some of the arguments against Foxtons sound similar to those leveled by stockbrokers and travel agents against their online rivals. Buying or selling a home "is the largest single financial transaction most people will make in their life," says Kathy Braddock, a real estate consultant and former executive managing director of Douglas Elliman in New York City. "You should be in the hands of a real expert." Iris Lurie, the owner of Century 21 Mack-Morris Iris Lurie in Marlboro, N.J., adds that Foxtons is "like going one step above selling your own home."

Debbie Jacobs, owner of Debbie Jacobs Realty in Metuchen, N.J., says that Foxtons clients don't receive the closing and negotiating services the firm claims to provide. (Cohen calls these charges "absolutely not true.") Jacobs says Foxtons sellers rely on her as the buyer's agent to arrange for inspections, phone lawyers, remind them to change the names on the utilities, and notify them of closing and moving dates. At the same time, she says, Foxtons' brash campaign has forced her to cut her prices. "All it takes is one agency in the area to start lowering its commissions, and we have to compete with that," she says. "We've had to take more 4% commissions than we'd like to."

Most Realtors argue that Cohen's impact has been minimal, an impression shared by Steve Murray, the editor of REAL Trends' newsletter. "Foxtons may have taken some market share, but not from the leading firms."

Those words, though, are at odds with the actions taken by some brokerages. In 2001, Coldwell Banker opened its own 2% brokerage, called Blue Edge, in Pittsburgh and Springfield, Ill. (Today, Coldwell Banker will say only that Blue Edge has not expanded and remains "a test.") And this summer Coldwell Banker Residential Brokerage of New Jersey and Rockland County, N.Y., ran a radio attack ad against "the two-percenters." (Foxtons is never mentioned in the ad, but it is the only local brokerage trumpeting its 2% fees.) "Two percent doesn't give your home maximum exposure," says the ad. "Bottom line: 2% can lose you valuable time and cost you thousands of dollars." All the attention, Cohen says, is flattering. "They figure they'd better stop us now because they're scared to death that when we march across the country, we'll destroy their bottom line," he says. Coldwell Banker declined to discuss the ad.

It's hard to know how seriously to take this bluster, because Cohen won't release much financial data. He does say that he spends 15% to 20% of his revenues on advertising and sells about 150 homes a week, which would mean he brings in $60 million to $80 million on sales of 7,800 houses annually. That's possible, says REAL Trends' Murray. Cohen also claims an 8% market share in New Jersey and 5% in greater New York City. To that claim, Murray says, "I think that's a crock. If he does that much business, why wouldn't he allow us to verify his data?" Cohen cites a desire to keep his competitors guessing. He also says his company is profitable, but he won't provide evidence. In an industry awash in data and rankings, Foxtons is a wild card.

Some realty experts predict that Foxtons will suffer as a cooling market bestows more value on agent expertise and MLS exposure. "The Foxtons business model has a lot of merit," says consultant John Tuccillo, who was chief economist for the National Association of Realtors from 1987 to 1997, "but when the market turns normal, they're going to have a problem." Naturally Cohen disagrees, predicting a boom in cost-conscious home buyers and sellers seeking low commissions.

Much will depend on the patience of Cohen's biggest investor. Foxtons U.K.'s founder, Jonathan Hunt, is known for his ambition and tenacity--which implies he'll weather the storm until his American counterpart succeeds. But he's facing a distraction at home. His firm is under police investigation in London over accusations that it deliberately tore down thousands of for sale signs belonging to other agents. Foxtons U.K. has admitted the practice occurred for a short period in 2001, but denies it was widespread. Foxtons U.S. is not implicated in any way.

Nevertheless, when Cohen describes himself and the controversial Hunt as "like two peas in a pod," you have to believe him--both men have outsized dreams and a combative attitude. When asked how he can expect to topple an entrenched business model in a sliding market, over the objections of almost a million Realtors whose livelihoods are at stake, Cohen simply shrugs: "I'm sure someone said something like that to Charles Schwab 15 years ago."